Alternatives to NAMA.

SkepticOne

As we are all aware, the problem for banks is that they have loans on their books that will never be repaid by companies that are essentially bust secured against property that is more or less worthless.

They can't move against any of these companies, however, because that would bring the house of cards down. While no one makes a move, there is a sort of equilibrium. Everyone can pretend to themselves and each other that the underlying assets are worth more than they are since nothing is being tested by the market.

The issue for the banks is that this leads to paralysis. The can't foreclose on the developers as they should but at the same time the can't continue to roll up interest into the loans forever to keep them going. They are certainly not businesses a bank would want to keep going in normal circumstances.

This is where NAMA come in. With NAMA the paralysis is transferred from the banks to the public. The tax payer (and future tax payers) will now have to continue the process of funding businesses that have effectively failed. They will even have to lend extra money to developers to complete projects (and it will be in the interest of developers to drag out those projects).

If eventually the developer fails, the tax payer will take possession of the underlying next-to-worthless asset. But NAMA can't sell those assets since that would have the effect of putting a value on all the assets held by NAMA. So NAMA will gradually build up large amounts of property it can't sell without undermining the NAMA model. NAMA itself will have the effect of preventing a recovery in asset prices due to the vast overhang of properties it will hold.

Most of the commentary and complaints about NAMA are concerned with the issue of overpaying and underpaying for the bank assets but I think the big issue is the damage it will do the the economy due to its existence over the next decade or more. The transfer of assets from the bank will take about a year but the main work of NAMA happens after this transfer has taken place.

The basic problem with NAMA is that it is a continuation of the head-in-the-sand approach of the banks that led created the problem in the first place. Any solution must therefore involve facing up to the problem. Take the hit now rather than put it off.

Here's what should happen. These are not original suggestions but I don't have time to attribute them at the moment. The point is to come up with something that works.

1. Nationalise the banks.
2. Force the impaired loans on to the market for whatever they can achieve. Allow a limited time scale (say, a year) for this to happen.
3. Recapitalise the banks to the extent that they become saleable.
4. Privatise the banks.

There should be an overall time scale of about a year for all this to happen. There would need to be an independent group of assessors that would examine the books of the banks to determine what are impaired loans and what is reasonable, but it would not own anything.

Has anything been left out? What other alternatives are there?

Sea Sharp

Vote yes to Lisbon and hope that the ECB suddenly decides to help us out

tlev

GaNjaHaN wrote: »

Vote yes to Lisbon and hope that the ECB suddenly decides to help us out

We are getting 400m a week, how much more can we ask for???:D:D

SkepticOne

The ECB are effectively helping us dig an even bigger hole for ourselves.

ei.sdraob

tlev wrote: »

We are getting 400m a week, how much more can we ask for???:D:D

im not sure that 400-450m / week figures comes only from ECB, i believe it comes from entities buying Irish bonds (for which we would have to pay interest on via taxes) thru NTMA, tho i could be wrong


ECB / EU money is at a bit more than that, Scofflaw had a figure of 120 billion already in some thread earlier? once again i dont have figures right now as it depends what once chooses to count


indirectly we were and are getting "cheap" money from ECB a very long time due to low rates


but we blew that money and we are still at it, with rates at 1% banks should be funneling the cheap money towards investment in enterprise (thats the point of the rates being set so low to kick start recovery) and green energy, instead they are taking that money and trying to plug the black holes in their balance sheets left from the property orgy

The ECB are effectively helping us dig an even bigger hole for ourselves.

they are trying to help us and all other euro member economies to recover by keeping rates low, that is their job

but instead of getting our house in order by implementing bord snip recommendations fast, we are commiting ourselves to NAMA (Which is an indirect form of quantative easing as that money would originate from ECB)

GaNjaHaN wrote: »

Vote yes to Lisbon and hope that the ECB suddenly decides to help us out

as a YES supporter may I ask what does Lisbon have to do with this? maybe in an indirect manner but i see no direct ties back to lisbon

SkepticOne

I suppose the essential point of my post is that we can't solve the problems NAMA is supposed to solve through perpetuating the stupidity that led to those problems in the first place.

The designers of NAMA seem to have had one principle only: The full reality of the predicament we find ourselves in must be put off for as long as possible even if that makes the problem worse.

Any solution must represent a departure from the failed thinking of the past.

Sea Sharp

as a YES supporter may I ask what does Lisbon have to do with this? maybe in an indirect manner but i see no direct ties back to lisbon

Ah, I'm not suggesting that rationally or with evidence to back it up, feel free to disregard it.

Indirectly though maybe somebody high up in Europe will pull a few strings in a kind of a "You scratch my back, I'll scratch yours" kind of way.

If only we could just print the money eh?

ei.sdraob

@GaNjaHaN

what good what printing money do?

UK printed ("quantative easing" euphemism) hundreds of billions

and their "green shoots" (yet another euphemism) is nothing more than green weeds


btw the article linked above is a great disturbing read


edit: lol at the post above mine who posted at same time

Sea Sharp

Quantitative easing won't recover the economy, but it's a good way of balancing the books, which puts us in a position whereby recovery becomes possible.

What if something analogous to NAMA was set up by the EU. We're not the only country in Europe in a property bubble burst mess.

All the money needed is printed, and then the EU owns all the excess property throughout Europe.

ei.sdraob

GaNjaHaN wrote: »

Quantitative easing won't recover the economy, but it's a good way of balancing the books, which puts us in a position whereby recovery becomes possible.

What if something analogous to NAMA was set up by the EU. We're not the only country in Europe in a property bubble burst mess.

All the money needed is printed, and then the EU owns all the excess property throughout Europe.

balancing the books?

you blow 1000 euro on hookers and coke in one night

no amount of wishful thinking will make that money comeback and balance your current account




this situation is the same, we blew the wealth while we had it, printing money wont make it comeback,

lets say theres only 100 euro in the whole economy and you print 1% of that

you now have 101 euro in the economy, that extra 1 euro "stole" value from every other euro in the currency, this is in effect a form of stealth tax, hence why they are so enthusiastic about in UK, raising direct taxes would cause uproar but your average Joe doesn't realize that the pound in their pocket is worth less now thanks to something called "quantitative easing", he doesnt know its an euphemism for "taxing every single unit of currency out there and no one being non the wise"

increasing productivity, cutting waste in welfare and PS, exporting more will generate real wealth, printing money wont

Sea Sharp

you blow 1000 euro on hookers and coke in one night

:pac:

lets say theres only 100 euro in the whole economy and you print 1% of that

you now have 101 euro in the economy, that extra 1 euro "stole" value from every other euro in the currency, this is in effect a form of stealth tax, hence why they are so enthusiastic about in UK, raising direct taxes would cause uproar but your average Joe doesn't realize that the pound in their pocket is worth less now thanks to something called "quantitative easing"

But that's the beauty of it. Extending your analogy, lets say there is country with it's own currency which all together comes to 100E. The country is made up of 5 people each of whom have 20E in wealth, but the government is bankrupt.

If the government needs E20 and prints it, there is now E120 in the whole economy. But the 5 citizens still have E20.

What this means is that each citizen had 20/100 = 20% of the available currency, now they have 20/120 = 16.7% of the total currency.
Assuming that real wealth is a measure of your wealth vs total available wealth, this is the equivalent to the government taking 3.3% of everybodys money. However as you said:

raising direct taxes would cause uproar but your average Joe doesn't realize that the pound in their pocket is worth less now thanks to something called "quantitative easing"

quantitative easing is a sneaky way of redistributing wealth. Before each citizen had 20% of the total wealth, now they have 16.7%. The government had 0% of total wealth, now it has 16.7%.

Back on topic, the money which this country currently owes still exists. Abeit p1ssed away by over-payed builders buying fancy cars and expensive golf trips, the Euros they earned and spent still exist.
If the EU undertook something similar to NAMA and printed the cash, they would be taxing (in an indirect way) anybody who holds Euros in wealth.

You are right in saying that:

increasing productivity, cutting waste in welfare and PS, exporting more will generate real wealth, printing money wont

but printing money will redistribute the available wealth so as to fix the massive debts accumulated throughout the EU. Once that has been done we're still going to have to increase productivity etc..

SkepticOne

It has to be stuff that the government can do instead of the current NAMA plan. Ireland has negligible if not zero influence over the actions of the ECB.

ei.sdraob

GaNjaHaN wrote: »

:pac:



But that's the beauty of it. Extending your analogy, lets say there is country with it's own currency which all together comes to 100E. The country is made up of 5 people each of whom have 20E in wealth, but the government is bankrupt.

If the government needs E20 and prints it, there is now E120 in the whole economy. But the 5 citizens still have E20.

What this means is that each citizen had 20/100 = 20% of the available currency, now they have 20/120 = 16.7% of the total currency.
Assuming that real wealth is a measure of your wealth vs total available wealth, this is the equivalent to the government taking 3.3% of everybodys money. However as you said:

quantitative easing is a sneaky way of redistributing wealth. Before each citizen had 20% of the total wealth, now they have 16.7%. The government had 0% of total wealth, now it has 16.7%.

Back on topic, the money which this country currently owes still exists. Abeit p1ssed away by over-payed builders buying fancy cars and expensive golf trips, the Euros they earned and spent still exist.
If the EU undertook something similar to NAMA and printed the cash, they would be taxing (in an indirect way) anybody who holds Euros in wealth.

You are right in saying that:



but printing money will redistribute the available wealth so as to fix the massive debts accumulated throughout the EU. Once that has been done we're still going to have to increase productivity etc..

yep your example is same as my example i just didn't go into as much detail were on same wavelength now

printing money would firstly make everyone holding the currency poorer (as me and you illustrated) and penalizes the people who were responsible with it and/or savers

do you think the prudent Germans would be to happy with their wealth being eroded in order to help out the Irish or the rest of PIIGS? not at all hence why the QE effort from ECB is tiny in comparison to BOE and Fed


yes the money spent is still here in form of empty houses and office blocks, but poof billions have disappeared into thin air as no one actually wants or for that matter afford this property, and then there was the money spent by the developers on golf, drink, offshore accounts, coke and hookers :pac:

basically 25% of our economy was in construction which does not generate any wealth

wealth in a country is generated via exports (or by raping colonized lands)


construction would generate wealth if people from abroad were buying the property here with the money from their economy, in fact the opposite was happening

i was talking to a chap from serbia who was amused by irish coming over and spending alot of money by local standards on flats and villas in there, montenegro and rest of eastern europe

eamonnm79

ALL Together now

NATIONALISE!

Sand

Why nationalise? That will just mean taking on the banks debts. Its better than NAMA but why not simply leave the banks to negotiate with their creditors using those brilliant banking skills of theirs?

Plenty of banks have already arranged for bond holders to convert their interests into equity which helps the banks balance sheet and allows the bond holders to take advantage of an upswing in bank share price.

The only interest the government should have is securing the deposits of small (hence the largest number) or depositors as best as is possible. Let the banks figure out the rest.

SkepticOne

Sand wrote: »

Why nationalise? That will just mean taking on the banks debts. Its better than NAMA but why not simply leave the banks to negotiate with their creditors using those brilliant banking skills of theirs?

Plenty of banks have already arranged for bond holders to convert their interests into equity which helps the banks balance sheet and allows the bond holders to take advantage of an upswing in bank share price.

The government guarantee scheme has put an end to that option.

Tech3

The implementation of NAMA is going to financially cripple our economy for many years ahead. It is simply going to delay the inevitable: a house of cards on its final legs.

Let the market adjust back to normal levels(pre 1996) so we can recover in the years ahead without affecting future generations with high tax and never ending national debt.

christyirish

"1. Nationalise the banks.
2. Force the impaired loans on to the market for whatever they can achieve. Allow a limited time scale (say, a year) for this to happen.
3. Recapitalise the banks to the extent that they become saleable.
4. Privatise the banks.

There should be an overall time scale of about a year for all this to happen. There would need to be an independent group of assessors that would examine the books of the banks to determine what are impaired loans and what is reasonable, but it would not own anything.

Has anything been left out? What other alternatives are there?"

The clear alternative is a debt for equity swap - once the guarentee expires force bond holders in the bank to swap their bonds for equity

this is what happens when companies go bankrupt!!

SkepticOne

christyirish wrote: »

The clear alternative is a debt for equity swap - once the guarentee expires force bond holders in the bank to swap their bonds for equity

this is what happens when companies go bankrupt!!

Is that possible with the guarantee scheme extended to bond holders as it currently is?

christyirish

"wealth in a country is generated via exports (or by raping colonized lands) construction would generate wealth if people from abroad were buying the property here with the money from their economy, in fact the opposite was happening"

This is uttter nonsense

The principle reason that a country exports is to allow it to buy imports thereby increasing its consumption possibilities. This implies we dont need to produce everything we consume here in Ireland.

For a country as small as Ireland there is an added benefit. Our domestic market is often too small to exploit economies of scale. Export markets allow us to get around that problem.

Domestic production creates income/wealth in exactly the same way that exports do.

Construction creates wealth in the same way that other production does. The problem is that there is limited room for productivity gains in the construction sector relative to other sectors such as pharmas or IT

Whether or not property/land is owned by foreigners or domestic residents is not a particularly relevent consideration here.

christyirish

The guarentee does not extend to all bondholders - nor does it extend forever

christyirish

"The implementation of NAMA is going to financially cripple our economy for many years ahead. It is simply going to delay the inevitable: a house of cards on its final legs.

Let the market adjust back to normal levels(pre 1996) so we can recover in the years ahead without affecting future generations with high tax and never ending national debt."

If only it were that simple!

If the market adjusts ( I assume u mean property market) back to 1996 prices, our banks will be comprehensively undercapitalised. They will need to be recapitalised in order to continue to operate. The government has pledged to supply whatever capital is required to fill this substantial hole. They need to borrow the money required to do this. Hence, the gov debt mountain and higher taxes

Moreover, if prices fall to 1996 levels employment and incomes in the construction sector will collapse - this has obvious consequences for the public finances and domestic demand.

christyirish

"Why nationalise? That will just mean taking on the banks debts."

This is not necessarily the case - the governement can act as a limited liability shareholderin the sam way as a private investor

ei.sdraob

christyirish wrote: »

This is uttter nonsense

The principle reason that a country exports is to allow it to buy imports thereby increasing its consumption possibilities. This implies we dont need to produce everything we consume here in Ireland.

For a country as small as Ireland there is an added benefit. Our domestic market is often too small to exploit economies of scale. Export markets allow us to get around that problem.

Domestic production creates income/wealth in exactly the same way that exports do.

Construction creates wealth in the same way that other production does. The problem is that there is limited room for productivity gains in the construction sector relative to other sectors such as pharmas or IT

Whether or not property/land is owned by foreigners or domestic residents is not a particularly relevent consideration here.

Constructing houses to meet demand is indeed a productive activity

but we all know there were more property build than natural demand, the demand that existed was speculation like BTL

thats not wealth creation, a third of commercial space in ireland is empty, i dont know how many residental units but looking around there are plenty of empty places

if that space was used by business to create goods and services then it be useful but its not, there are offices here in galway lying empty for almost a decade now

so there ya go

as for foreigners buying property that is a form of foreign investment, for an example see Dubai

christyirish

Im not sure what you mean by "natural demand" but with repect to the domestic residential housing stock - ie the number of houses we have to house our population - our level is still below the EU average even after the dramatic supply response of recent years.

However i agree with your point that a proportion of the investment in housing/ commercial property was wasted. This is often a symptom of a bubble - same happened with the dotcom bubble

My point was made to address a previous post that suggested that exports were the only way of creating wealth and that construction didnt create wealth. As a category of investment it does create wealth. Thats different from saying that every property investment does create wealth

Foreigners buying property here is similar to foreigners buying equity stakes in irish owned businesses. They get the flow of income that the asset generates and in return domestic reidents get the purcahse price. I dont see how this is relevant

Tech3

christyirish wrote: »

If only it were that simple!

If the market adjusts ( I assume u mean property market) back to 1996 prices, our banks will be comprehensively undercapitalised. They will need to be recapitalised in order to continue to operate. The government has pledged to supply whatever capital is required to fill this substantial hole. They need to borrow the money required to do this. Hence, the gov debt mountain and higher taxes

Yes I am aware of that. If NAMA gets passed through then I can see major losses anyway and in the end of the day the taxpayer will always pay the loss no matter which way it goes.

Moreover, if prices fall to 1996 levels employment and incomes in the construction sector will collapse - this has obvious consequences for the public finances and domestic demand.

Lower incomes are on the way anyway to both the private and public sector and the fat public sector will be chopped severely.

Also most of the construction sector are on lower incomes and many are now unemployed. The government is moving its focus of GDP back to a export led economy again and construction is having less of an influence. I agree there will be less money in the economy and therefore I think we shall go default in the next 4-5 years.

christyirish

well, if nama gets passed the crucial question will be what price the government pays for the loans

if the government overpays - and every indication from the government and the legislation seems to imply they will - then the losses to the taxpayer will be substantially increased - probably somewhere between 10,000 and 30,000 for every person in ireland

christyirish

" in the end of the day the taxpayer will always pay the loss no matter which way it goes"

The key differnce is what does the taxpayer get in return for covering these losses. Specifically, will we own two major banks and be able to sell them off - or will we own nothing in return for covering the banks losses

SkepticOne

christyirish wrote: »

Moreover, if prices fall to 1996 levels employment and incomes in the construction sector will collapse - this has obvious consequences for the public finances and domestic demand.

I'm not sure I fully understand this. Hasn't employment in the construction sector already collapsed and wasn't it due to unattainably high prices that this has happened?

SkepticOne

christyirish wrote: »

well, if nama gets passed the crucial question will be what price the government pays for the loans

if the government overpays - and every indication from the government and the legislation seems to imply they will - then the losses to the taxpayer will be substantially increased - probably somewhere between 10,000 and 30,000 for every person in ireland

Yes they intend to overpay, otherwise they would not have stated in the bill that they should not go above market price rather than somewhere between market price and the long term "economic value" (whatever that means) of the asset.

christyirish

SkepticOne wrote: »

I'm not sure I fully understand this. Hasn't employment in the construction sector already collapsed and wasn't it due to unattainably high prices that this has happened?

Employment and incomes in the construction sector have fallen significantly - I suppose the point is where do they stop. How many people can be sustainably employed in the construction sector versus how many people are currently employed there. I cant remember the stats off the top of my head - but i think about 220,000 employed at the peak of the bubble and estimates suggest 110, 000 in the long run. If house prices overshoot downwards employment levels might fall below that for a period.

My general point was a response to a suggestion that if house prices fall to 1996 levels it would solve or help to solve the current situation.